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Littoral Combat Ship Acquisition Strategies Depends on Successful 
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United States Government Accountability Office:


Before the Committee on Armed Services, U.S. Senate: 

For Release on Delivery: 
Expected at 2:30 p.m. EST:
Tuesday, December 14, 2010: 

Defense Acquisitions: 

Realizing Savings under Different Littoral Combat Ship Acquisition 
Strategies Depends on Successful Management of Risks: 

Statement of Paul L. Francis, Managing Director: 
Acquisition and Sourcing Management: 


[End of section] 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss the Department of the Navy's 
proposed dual ship acquisition strategy for the Littoral Combat Ship 
(LCS) program. LCS is envisioned as a vessel able to be reconfigured 
to meet three different mission areas: mine countermeasures, surface 
warfare, and antisubmarine warfare. Its design concept consists of two 
distinct parts--the ship itself (seaframe) and the mission package it 
carries and deploys. The Navy is procuring the first four ships in two 
different designs from shipbuilding teams led by Lockheed Martin and 
General Dynamics, which currently build their designs at Marinette 
Marine and Austal USA shipyards, respectively. 

The Navy's strategy for procuring LCS has evolved over the years. 
Prior to September 2009, the Navy planned to continue building the 
class using both ship designs. This strategy changed following 
unsuccessful contract negotiations that same year for fiscal year 2010 
funded seaframes--an outcome attributable to industry proposals priced 
significantly above Navy expectations. In September 2009, the Navy 
announced that in an effort to improve affordability, it was revising 
the LCS program's acquisition strategy and would select one seaframe 
design before awarding contracts for any additional ships.[Footnote 1] 
Following approval of this strategy in January 2010, the Navy issued a 
new solicitation--intended to lead to a downselect--for fiscal year 
2010 seaframes. In support of this strategy, Congress authorized the 
Navy to procure up to 10 seaframes and 15 LCS ship control and weapon 
systems. The Navy planned to have a second competition in 2012 and 
provide five of the ship control and weapon systems to the winning 
contractor, who would construct up to 5 ships of the same design and 
install the systems. However, in November 2010, following receipt of 
new industry proposals for the fiscal year 2010 seaframes, the Navy 
proposed to change its acquisition strategy back to awarding new 
construction contracts to both industry teams.[Footnote 2] 

In August 2010, we issued a report evaluating LCS planning and 
implementation efforts that identified technical, design, and 
construction challenges that could impact the Navy's ability to 
deliver promised LCS capabilities.[Footnote 3] This statement 
highlights findings from that report and a subsequent report issued on 
December 8, 2010, which assessed risks that could affect the Navy's 
ability to execute the LCS program.[Footnote 4] As detailed in our 
most recent report, we found that regardless of the strategy selected, 
the Navy continues to face design and construction risks in executing 
the LCS program, given its stage of maturity and its unique mission, 
design, and operational concept. These risks threaten the Navy's 
ability to achieve the cost savings it estimates under either of its 
acquisition strategies. 

In preparing this testimony, we relied primarily on work supporting 
our most recent LCS report. That report contains a detailed overview 
of our scope and methodology. All of our work for this report was 
performed in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 


Successful business cases for shipbuilding programs require balance 
between the concept selected to satisfy warfighter needs and the 
resources--technologies, design knowledge, funding, time, and 
management capacity--needed to transform that concept into a product. 
Without a sound business case, program execution will be hampered, 
regardless of the contracting strategy. The LCS, given its stage of 
maturity and its unique mission, design, and operational concept, 
still faces design and construction risks. Most of these risks appear 
to be inherent to the program, regardless of which acquisition 
strategy is followed. Navy officials believe that experience to date 
on the program, coupled with fixed price contracts and a sufficient 
budget for ship changes, mitigates this risk. However, much work and 
demonstration remains for LCS, and other shipbuilding programs have 
had difficulty at this stage. On the other hand, a second ship design 
and source provided under the dual award strategy could provide the 
Navy an additional hedge against risk, should one design prove 
problematic. Mission equipment packages are common to both ships and 
would pose the same execution risks, apart from integration. 

Key Features of the Downselect and the Dual-Award Strategies: 

The Navy estimates that both its existing and proposed acquisition 
strategies will generate significant cost savings to the government. 
According to the Navy, $1.9 billion in savings resulted from the 
competition between the two offerors and is common to both strategies. 
However, the Navy estimates that approximately $1.0 billion in 
additional cost savings would be realized under the proposed dual 
award strategy because of the avoidance of higher start-up costs and 
risks associated with the second source planned for fiscal year 2012, 
among other factors. According to the Navy, these additional savings 
would be offset, in part, by increased total ownership costs. The Navy 
plans to use some of the remaining savings, if realized, to fund 
construction of an additional LCS seaframe in fiscal year 2012. Table 
1 compares the key tenets of each strategy. 

Table 1: Comparison of the Navy's Current and Proposed LCS Acquisition 

Existing LCS acquisition strategy (January 2010): Contract with a 
single source on a fixed-price basis for up to 10 ships (2 ships 
awarded per year) from fiscal year 2010 through fiscal year 2014; 
Proposed LCS acquisition strategy (November 2010): Fixed-price 
contracts to two industry teams for up to 10 ships each (1 or 2 ships 
awarded per year) through fiscal year 2015 (total of up to 20 ships). 

Existing LCS acquisition strategy (January 2010): Second solicitation 
for up to 5 additional ships to be constructed at a separate yard with 
awards planned between fiscal years 2012 and 2014; 
* First source would provide the combat systems for the 5 additional 
ships constructed by the second shipyard; 
Proposed LCS acquisition strategy (November 2010): Program benefits, 
as identified by the Navy, that include: 
* stabilizing the program and the industrial base with award of 20 
* funding an additional ship in fiscal year 2012 to support 
operational requirements; 
* sustaining competition through the program, and; 
* enhancing Foreign Military Sales opportunities. 

Existing LCS acquisition strategy (January 2010): Navy estimates $1.9 
billion in cost savings attributable to: 
* near-term competitive pricing pressures between the two current LCS 
shipbuilding teams; 
* economic order quantity purchases of key materials; 
* efficiencies associated with potentially moving to a single, common 
combat system, and; 
* significantly reduced total ownership costs for the Navy; 
Proposed LCS acquisition strategy (November 2010): Navy estimates 
program benefits would generate approximately $1 billion in additional 
savings (which the Navy equates to a net present value of $910 
million) above those estimated under the existing strategy that are 
attributable to: 
* avoiding higher start-up costs (such as nonrecurring engineering and 
design costs) associated with awarding contracts to a second source 
starting in fiscal year 2012 and by; 
* achieving greater labor efficiencies by constructing the ships at a 
higher rate. 

Existing LCS acquisition strategy (January 2010): Navy estimates that 
the cost benefits would be offset, in part, by the start-up costs 
associated with introducing a second source in fiscal year 2012; 
Proposed LCS acquisition strategy (November 2010): According to the 
Navy, these savings would be offset, in part, by an additional $842 
million in total ownership costs, which the Navy equates to a net 
present value of $295 million. 

Source: GAO analysis of Navy materials. 

Note: Given time constraints, GAO did not fully assess the Navy's 
assumptions that underpin the benefits it estimates for each strategy. 

[End of table] 

The quantities planned under both of the Navy's strategies are similar 
through fiscal year 2015. These similarities are outlined in table 2, 
which details the Navy's procurement plans for seaframes under both 
the existing downselect strategy and the proposed dual award strategy. 

Table 2: LCS Seaframe Procurement Plans: 

Existing downselect: Winner; 
Fiscal year 2010: 2; 
Fiscal year 2011: 2; 
Fiscal year 2012: 2; 
Fiscal year 2013: 2; 
Fiscal year 2014: 2; 
Fiscal year 2015: 4. 

Existing downselect: Second source; 
Fiscal year 2010: [Empty]; 
Fiscal year 2011: [Empty]; 
Fiscal year 2012: 1; 
Fiscal year 2013: 2; 
Fiscal year 2014: 2. 

Existing downselect: Total; 
Fiscal year 2010: 2; 
Fiscal year 2011: 2; 
Fiscal year 2012: 3; 
Fiscal year 2013: 4; 
Fiscal year 2014: 4; 
Fiscal year 2015: 4; 
Total: 19. 

Proposed dual award: Contractor A; 
Fiscal year 2010: 1; 
Fiscal year 2011: 1; 
Fiscal year 2012: 2; 
Fiscal year 2013: 2; 
Fiscal year 2014: 2; 
Fiscal year 2015: 2. 

Proposed dual award: Contractor B; 
Fiscal year 2010: 1; 
Fiscal year 2011: 1; 
Fiscal year 2012: 2; 
Fiscal year 2013: 2; 
Fiscal year 2014: 2; 
Fiscal year 2015: 2. 

Proposed dual award: Total; 
Fiscal year 2010: 2; 
Fiscal year 2011: 2; 
Fiscal year 2012: 4; 
Fiscal year 2013: 4; 
Fiscal year 2014: 4; 
Fiscal year 2015: 4; 
Total: 20. 

Source: Navy. 

[End of table] 

Under the dual award strategy, the government will be authorized to 
contract for up to 20 ships. In contrast, the existing downselect 
strategy limits this authorization to up to 10 ships until fiscal year 
2012, when the Navy planned to solicit a second source for additional 

Design Changes Could Increase Near-Term Costs above Current Estimates: 

Under both the existing downselect strategy and the proposed dual 
award strategy, the Navy plans to award fixed-price incentive 
contracts for new seaframes. This type of contract provides for 
adjusting profit and establishing the final contract price by 
application of a formula based on the relationship of total final 
negotiated cost to total target cost. The final price is subject to a 
price ceiling, negotiated at the outset. In the case of LCS, the 
solicitation stated that the government would share 50 percent of 
costs above the target cost, up to the price ceiling. Navy officials 
also stated that they have budgeted management reserve funds to 
accommodate potential impacts to cost performance during program 
execution. In other programs, the Navy has returned to Congress to 
request funding for costs exceeding the target costs. In the near 
term, cost increases are likely but it is unknown whether increases 
will exceed what the Navy has budgeted for fiscal years 2010 and 
beyond. The likely source of these cost increases is design changes, 
which result in out-of-sequence work, potentially limiting the 
shipbuilders' ability to achieve the benefits they anticipate from 
construction process improvements and shipyard capital investments. 

Our August 2010 report on LCS discussed issues with the performance of 
particular ship systems at the time of lead ship deliveries and as a 
result of subsequent operating experience.[Footnote 5] In an effort to 
address technical issues on the first two ships, the Navy has 
implemented design changes for the third and fourth LCS seaframes (LCS 
3 and LCS 4), several of which are not yet complete. These changes are 
significant and have affected the configuration of several major ship 
systems including propulsion, communications, electrical, and 
navigation. In addition, launch, handling, and recovery systems for 
both designs are still being refined, although the Navy reports recent 
progress related to each of these systems.[Footnote 6] To the extent 
that these design changes necessitate modifications in the ship 
specifications on which the contractors based their proposals for 
future ships, contract modifications will need to be negotiated and 
priced. According to the Navy, it estimates funding requirements for 
these change orders to total 5 percent for all future follow-on ships 
produced, regardless of whether it proceeds with a downselect strategy 
or the proposed dual award strategy. In addition, Navy officials 
stated that the seaframe solicitation includes a provision that agreed 
to design changes are "not to exceed" $12 million--a feature that Navy 
officials state will bound government cost risk due to design changes. 
Pending full identification and resolution of deficiencies affecting 
the lead ships, the Navy's ability to stay within its budgeted limits 
remains to be seen. 

As we reported earlier this year, the LCS shipbuilding teams have 
implemented process and capacity improvements based on lessons learned 
from constructing lead ships and have made capital investments in 
their yards in an effort to increase efficiency.[Footnote 7] Fully 
realizing these improvements may be challenging given the design 
changes still occurring in the program. To the extent that addressing 
technical issues disrupts the optimal construction sequence for follow-
on ships, additional labor hours could be required beyond current 
forecasts. Introducing such inefficiencies could offset initial 
benefits obtained from the process improvements and new facilities the 
shipbuilders have put into place, increasing the risk of out-of-
sequence work and rework. Some level of design changes can be 
reasonably expected given the testing that remains. To date, however, 
Navy officials report that LCS 3 and LCS 4 changes are being managed 
efficiently--citing improved cost and schedule performance by both 
shipbuilders. The Navy also believes that the LCS seaframe may be less 
affected by mission equipment changes than other ships given the 
equipment's modular design. Maintaining a high level of performance 
will depend on avoiding significant design changes to seaframes under 

Operations and Support Costs Difficult to Estimate: 

Navy officials expressed confidence that their cost estimate 
supporting the dual award provides details on the costs to operate and 
support both designs. However, since little actual LCS operating and 
support data are available to date, the Navy's estimates for these 
costs are currently based on data from other ships and could change as 
actual cost data become more available. These estimates are also based 
on new operational concepts for personnel, training, and maintenance 
that have not been fully developed, tested, and implemented. For 
example, the Navy has not yet implemented a comprehensive training 
plan, and it is possible that the plan could cost more or less than 
the training costs currently accounted for by the Navy. 

In addition, the Navy has not studied--within the context of the 
downselect strategy--the potential savings associated with early 
retirement of the two nonselected design ships. As such, decision 
makers do not have a complete picture of the various options available 
to them related to choosing between the downselect and dual award 
strategies. Under the existing downselect strategy, the Navy's 
intention is to keep in service--at least initially--the other two 
ships of the design not selected for long-term production. The Navy 
acknowledged that operating and supporting two different designs 
carries increased costs as compared to the costs of employing only one 
design. As we previously reported, these costs include separate 
training facilities because each design has unique equipment and 
therefore different operating and maintenance requirements.[Footnote 
8] In February 2010, we recommended that the Navy conduct a cost- 
benefit analysis of options for these two ships, including the 
possibility of retiring them from service--a recommendation with which 
the Department of Defense agreed. As we point out in the February 
report, it is important that estimates of long-term operating and 
support costs are available to assess alternatives before a decision 
is made, particularly since these costs constitute over 70 percent of 
a system's life cycle costs. However, in discussions with Navy 
officials in November 2010, they told us that their latest assessment 
of the long-term costs of maintaining two ship designs does not 
consider the option of retiring the two nonselected ships. 

Mission Package Uncertainties and Delays: 

The Navy's request to double its current 10-ship authorization to 20 
ships--at a time when the mine countermeasures, surface warfare, and 
antisubmarine warfare mission packages continue to face significant 
developmental challenges--highlights the Navy's risk of investing in a 
fleet of ships that has not yet demonstrated its promised capability. 
Absent significant capability within its mission packages, seaframe 
functionality is largely constrained to self-defense as opposed to 
mission-related tasks. 

Navy officials acknowledged that mission package systems have taken 
significantly longer to develop and field than anticipated. 
Underscoring this situation is the fact that development efforts for 
most of these systems predate the LCS program--in some cases by 10 
years or more. However, Navy officials expressed confidence that their 
latest testing and production plans for mission package systems are 

Recent testing of mission package systems has yielded mixed results. 
The Navy reports that two systems within the mine countermeasures 
mission package recently completed developmental testing, but another 
system is undergoing reliability improvements following production of 
several units that did not meet performance requirements.[Footnote 9] 
Further, test failures contributed to the cancellation of a key 
surface warfare mission package system, and the future composition of 
the package remains undetermined.[Footnote 10] 

Developmental challenges facing individual systems have led to 
procurement delays for all three mission packages and have disrupted 
program test schedules. Most notably, the Navy reports the first 
operational testing event involving a seaframe and partial mission 
package is now scheduled for late second quarter of fiscal year 2012, 
and the Navy expects individual mission package systems to remain in 
development through 2017.[Footnote 11] 

To safeguard against excess quantities of ships and mission packages 
being purchased before their combined capabilities are demonstrated, 
we recommended in our August 2010 report that the Secretary of Defense 
update the LCS acquisition strategy to account for operational testing 
delays in the program and resequence planned purchases of ships and 
mission packages, as appropriate.[Footnote 12] The Department of 
Defense agreed with this recommendation, stating that an updated 
schedule was under development to better align seaframe and mission 
module production milestones. However, it is unclear how the 
department's concurrence with our recommendation can be reconciled 
against the Navy's current request to increase the planned seaframe 
commitment, particularly since no operational testing involving 
mission packages--or any of their individual systems--has since taken 
place. Until mission package and operational testing progresses--and 
key mine countermeasures, surface warfare, and antisubmarine warfare 
systems are proven effective and suitable onboard seaframes--the Navy 
cannot be certain that the LCS will deliver the full capability 
desired. This risk would increase with a commitment to higher 
quantities. The Navy believes this increased commitment is 
appropriately balanced against competing risks in the program. 

Mr. Chairman, that concludes my statement. I would be pleased to 
answer any questions. 

Contact and Staff Acknowledgments: 

For future questions about this statement, please contact me at (202) 
512-4841 or Individuals making key contributions to 
this report were Belva Martin, Acting Director; Diana Moldafsky, 
Assistant Director; Christopher R. Durbin; Jeremy Hawk; Kristine 
Hassinger; Simon Hirschfeld; and Karen Zuckerstein. 

[End of section] 


[1] The decision to select a single ship design is referred to as the 

[2] In response to the Navy's September 2009 LCS acquisition strategy 
change, General Dynamics and Austal USA revoked their teaming 
arrangement for future seaframes, in turn allowing the General 
Dynamics Bath Iron Works shipyard to compete for selection as the 
planned potential second source of the winning design. Austal USA and 
Lockheed Martin are the prime contractors competing for the current 10-
ship program. 

[3] See GAO, Defense Acquisitions: Navy's Ability to Overcome 
Challenges Facing the Littoral Combat Ship Will Determine Eventual 
Capabilities, [hyperlink,] 
(Washington, D.C.: Aug. 31, 2010). 

[4] See GAO, Navy's Proposed Dual Award Acquisition Strategy for the 
Littoral Combat Ship Program, GAO-11-249R (Washington, D.C.: Dec. 8, 

[5] [hyperlink,]. 

[6] According to Navy officials, the most recent progress related to 
LCS launch, handling, and recovery systems consists of (1) successful 
operation and movement of an embarked 11-meter rigid-hull inflatable 
boat onboard LCS 1 in March 2010, (2) synthetic lift lines on LCS 2 
successfully completing a 200 percent lift test, and (3) routine usage 
of a straddle carrier to move an 11-meter rigid-hull inflatable boat 
(with stowage cradle) and berthing modules around the LCS 2 mission 
bay. In addition, Navy officials state that LCS 1's system is 
scheduled to begin testing with the mine countermeasures mission 
package in fiscal year 2011 and testing of LCS 2's twin-boom 
extensible crane is progressing. 

[7] See GAO, Defense Acquisitions: Guidance Needed on Navy's Use of 
Investment Incentives at Private Shipyards, [hyperlink,] (Washington, D.C.: Jul. 26, 
2010) and [hyperlink,]. 

[8] See GAO, Littoral Combat Ship: Actions Needed to Improve Operating 
Cost Estimates and Mitigate Risks in Implementing New Concepts, 
[hyperlink,] (Washington, D.C.: 
Feb. 2, 2010). 

[9] According to Navy officials, the AN/AQS-20A sonar and Airborne 
Laser Mine Detection System recently completed developmental testing 
in August and October 2010, respectively. Alternatively, the Remote 
Minehunting System--produced since 2005--continues to struggle with 
reliability shortfalls. This has prompted the Navy to implement a 
series of design changes to the vehicle component and evaluate 
reducing the system's performance requirements. 

[10] Development of the Non-Line-of-Sight Launch System--an 
anticipated key system within the surface warfare package--was 
canceled in 2010 following test failures and higher than expected cost 
estimates. The Navy continues to evaluate alternatives to replace this 
capability onboard LCS. 

[11] According to Navy officials, the planned fiscal year 2012 
operational test will employ the first LCS (LCS 1) seaframe and a 
(partial) surface warfare mission package. This date represents a 
recent update to the program's testing plan as the Navy's fiscal year 
2011 budget estimates showed this event occurring in the third quarter 
of fiscal year 2013. 

[12] [hyperlink,]. 

[End of section] 

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